As we discussed in the previous part of our series, most companies have copper cash costs much above the prevailing copper prices. This could mean that copper producers may not curtail production in a big way at these levels, ensuring copper’s supply would continue to outpace demand—and further pressuring copper prices.
Meanwhile, industrial metals are falling for fundamental reasons. For iron ore, it’s a structural downtrend led by massive production overcapacity installed by mining companies including BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). Iron ore fundamentals could remain weak for long as analysts fear Chinese steel demand has peaked—much sooner than what was previously anticipated.
Chinese steel exports have risen at an alarming pace, pressuring global steel prices.
In aluminum, higher Chinese exports have pushed the market into surplus. You can define a surplus as production in excess of demand. The surge in Chinese aluminum exports has played its part in bringing down aluminum prices. The previous chart shows the recent trend in Chinese aluminum exports.
Interestingly, the copper industry doesn’t face any supply threat from China (FXI). China lacks access to copper deposits, and must import copper to meet its industry demand. Even the most pessimistic scenario would put China’s peak copper demand several years from now.
There are varying estimates of Chinese copper demand in 2015. According to Platts, quoting Antaike, Chinese copper consumption is expected to rise 6% year-over-year in 2015. However, Bloomberg has a much more pessimistic view of Chinese copper demand, expecting it to fall between 2% and 4% in 2015.
A lot of Chinese copper demand has been led by the “financing deals.” We’ll discuss how copper’s financial demand could play out in the coming months.